An Empirical Research On The Effect Of Listed Companies’Financial Flexibility On Inefficient Investment

The development of China’s capital market is still not perfect; the listed companies not only face on under-investment because of financial constraints, but also suffer from over-investment caused by principal-agent problem. The distort investment easily leads to inefficient resource allocation and hinder the sustainable healthy development. At present, the domestic scholars mostly study inefficient investment of listing corporation based on their equity financing preference, but seldom research on the effect of corporate financial flexibility on the efficiency of investment. Although there are a few documents involved in this area, it is not suitable for the capital market environment in our country and the special system background of the listing corporation. This thesis researches on the influence mechanism of financial flexibility on inefficient investment, wishing to make a contribution to improve the inefficient investment of listing corporation in China and economic consequences of financial flexibility.This thesis’s structure mainly concludes the following six aspects:the first part is the introduction, recommending the background and meaning of selecting this subject, explaining the purpose and contents of the research, stating the structure arrangement and the fundamental research method. The second part is the literature review, reviewing the related domestic and overseas literatures, summarizing the existing literatures about financial flexibility, distort investment and the relation between them. The third part is the theoretical analysis, by anglicizing the Financial Constraints Theory, Free Cash Flow Theory, Debt Governance Theory, Principal-agent Theory and the Asymmetric Information Theory, we make a theoretical support for the empirical research, based on two main lines, concluding the issue of financial flexibility, financing constraints and under-investment and the issue of financial flexibility, principal-agent and over-investment. The fourth part and the fifth part is the empirical test, respectively, the study design and the empirical analysis, with the5106research sample from A-share listed companies in China who have distort investment during2007-2011, we tests what effect financial flexibility has on distort investment and how different the effects are between the state-owned listing corporations and non state-owned listing corporations. The last part is the summary, concluding the empirical test, proposing policies and suggestions, pressing the possible innovations and presenting the deficiencies.Our study has showed that effects of financial flexibility on the inefficiency investment of the enterprises has two sides, one is that financial flexibility and under-investment has significantly negative correlation, in another word, reserves of financial flexibility of listed company can alleviate the financing constraints, reducing under-investment and the negative correlation is more obvious of non-state owned enterprises than that of state owned enterprises. The other one is financial flexibility has significantly positive effect on over-investment, which means that financial flexibility has worsen the agency problem and deteriorated the over-investment; compared with non-state owned enterprises, financial flexibility has more significantly positive influence on the over-investment of state owned enterprises.The main innovation of this thesis lies in the following three points. To begin with, this thesis attempts to analyze the effect of financial flexibility on inefficient investment based on the definition of financial flexibility, from two perspectives of excess cash holdings and ability to borrow, which is of great benefit for the research of financial flexibility and its economical consequences. Specifically, the thesis studied the question from two aspects, on the one hand, from financial flexibility, reducing financial constraints to releasing under-investment, on the other hand, from financial flexibility, increasing the problem of principal-agent to aggravating over-investment. What’s more, through using the method of empirical studies to research on listing corporation’s financial flexibility on its inefficient investment, we break through the laminations of using normative study method when the existing scholars solve the similar problem.